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The 

sareh for Bargains 


By 

JAMES R. BANCROFT 

President, American Institute of Finance. Lecturer on Foreign 
Exchange and Investments, Boston University. Formerly Manager 
Investment Department, Babson Statistical Organization. 



AMERICAN INSTITUTE OF FINANCE 
















V 


The 

Search, for Bargains 


By 

JAMES R. BANCROFT 

President, American Institute of Finance. Lecturer on Foreign 
Exchange and Investments, Boston University. Formerly Manager 
Investment Department, Babson Statistical Organization. 



AMERICAN INSTITUTE OF FINANCE 
BOSTON 








H fit oil 


Copyright, 1922, by 
American Institute of Finance 



©C1A695745 


N. 13^23 


TABLE OF CONTENTS 


Pa£e 

Chapter I. Why Stock Market Bargains Occur Frequently 

Everything in Balance.5 

Action and Reaction Ever Present.6 

How This Applies to the Stock Market .6 

Does the Stock Market Discount?.7 

The Human Element.8 

How to Benefit From These Conditions.9 

A Study of the Years 1919 and 1920 11 

Stock Dividends.12 

Conditions Grow Worse.13 

The Opportunities of 1921.14 

Chapter II. Change and Interchange 

A Critical Period.18 

Political Developments Important.19 

Crises of the Past One Hundred Years.20 

Declining vs. Advancing Prices.21 

Action and Reaction since 1900 . 22 

The War Markets.23 

Advent of the Federal Reserve System.23 

The Future.25 

Chapter III. Looking for Bargains 

What Do We Want to Do?. 27 

What is a Real Investment? ..27 

What is a Speculative-Investment?.. . . .28 

What is a Speculation?.29 

A Specific Illustration. 30 

Low Priced Issues.31 

Why Stocks are not Investment Bargains.31 

Margin Trading.32 

How to Analyze Industrial Earnings Statements.34 

Chapter IV. Stock Market Movements 

Distinct Types.38 

The Business Cycle Movement.38 

The Second and Third Stages.39 

Turning the Corner.40 

































4 


T able of Contents 


Pa&e 

Chapter IV. Stock Market Movements ( continued) 

The Price Cycle.41 

Changing Conditions.41 

Utility Operations Should Improve.42 

Yearly Fluctuations.43 

Chapter V. Making Money in the Stock Market 

What Brings Speculative Success?.46 

“Character”—A Most Important Ingredient.49 

A Second Essential.51 

The Correct Mental Attitude.52 

Have a Goia.1—Try to Attain It. 53 

Confine Purchases to Seasoned Securities.54 

Chapter VI. The Art of Right Thinking 

Vital Points in Success.56 

What is a Fortune?.57 

What is Financial Independence?. 58 

We Get What We Give.58 

Your Future.58 

The Enterprise.59 

What Has It to Offer? 60 

Who Will Handle Your Money?.61 

What is Going to be Done?.61 

What are You Buying?.61 

Why are You Buying?.62 























CHAPTER I 


WHY STOCK MARKET BARGAINS OCCUR 
FREQUENTLY 

“The World looks like a multiplication table or a mathe¬ 
matical equation , which , turn it as you will , balances 
itself. Take what figure you will , its exact value , no more 
nor less , still returns you .” 

Everything in Balance 

These words of Emerson are particularly applicable to the 
world of finance. Year in and year out, month in and month 
out, and day in and day out, there is present a conflict of forces, 
some on one side and some on the other. A perfect balance 
hardly ever exists. The balancing effect of these opposite 
forces is always present, however. It is this balancing of forces 
that causes a constant swinging back and forth, first on one 
side — then on the other. We never find all forces making for 
improvement, nor all forces making for decline. There are 
always offsetting forces that counteract. 

When the forces making for improvement are in majority, we 
have our periods of prosperity. When the forces making for 
decline are in majority, we have our periods of depression. As 
we are growing richer year after year, the total strength of the 
favorable forces over a period of years overbalances the un¬ 
favorable. As a result the world runs on what may be termed 
a constantly rising plane of existence. This has been termed our 
normal line of growth. The phenomena of first rising above 
this line and then falling below it we call prosperity and depres¬ 
sion. Like the pendulum of a clock, like the waves of the ocean, 
we swing back and forth, having our “ups” and “downs”. 


6 


The Search for Bargains 


Action and Reaction Ever Present 

In studying the development of business, social, economic, 
spiritual, or even natural conditions, it is necessary to bear in 
mind the existence of this phenomena. How important it is 
can be seen from the following: 

“Polarity, or action and reaction, we meet in every part of 
nature, in darkness and light, in heat and cold, in the ebb and 
flow of waters; in male and female; in the inspiration and expira¬ 
tion of plants and animals; in the systole and diastole of the heart; 
in the undulations of fluids and of sound; in the centrifugal and 
centripetal gravity; in electricity, galvanism, and chemical 
affinity. Superinduce magnetism at one end of a needle, the 
opposite magnetism takes place at the other end. If the South 
attracts, the North repels. To empty here, you must condense 
there. An inevitable dualism bisects nature, so that each thing 
is a half, and suggests another thing to make it whole: as, spirit, 
matter; man, woman; subjective, objective; in, out; upper, 
under; motion, rest; yea, nay. 

“This Law writes the laws of the cities and nations. It will 
not be balked of its end in the smallest iota. It is in vain to 
build or plot or combine against it. Things refuse to be mis¬ 
managed long. Though no checks to a new evil appear, the 
checks exist, and will appear. If the government is cruel, the 
governor’s life is not safe. If you tax too high, the revenue will 
yield nothing.” 

How This Applies to the Stock Market 

In no phase of activity is a recognition of the law of action 
and reaction more valuable than in the stock market. Crises 
and depressions are the reactions from periods of prosperity. 
Periods of prosperity are the result of the savings and stored-up 
energy of periods of depression. Periods of world development 
above the line of normal growth are marked by tremendous 
activity and sharply rising prices in the stock market. Periods 
below this line of normal growth are marked by fear, retrench¬ 
ment and cautiousness and are accompanied by rapidly 


Why Stock Market Bargains Occur 7 

declining stock market prices, dullness and general price 
readjustment. 

Moreover, in all such developments, the stock market is the 
most sensitive. It sounds warnings or gives encouragement to 
business men who watch its movements. It may be said to 
reflect the hopes and fears of the great majority of people rather 
than their knowledge of actual business and financial conditions. 
This has given rise to the statement “the stock market dis¬ 
counts”. It is this so-called discounting that makes it so 
valuable as a business index. We have never had a better 
illustration of this than the year 1920. 


Does the Stock Market Discount ? 

Does the market really discount? What discerning power is 
there to make it do so? In order to discuss these questions in¬ 
telligently we must consider just what are the forces behind any 
market movement. Probably the most vital ingredient for 
a strongly rising stock market is a good supply of money. With¬ 
out this little can be accomplished. We have also got to have 
an improving commercial situation but, given cheap money 
and a normal level of prices, this will follow. This is exactly 
what brought about the improvement in late 1921. 

Let us pause here to speak of that old but yet true adage, 
“Stocks do not go up, they are put up.” In other words, a 
bull movement in a stock or the stock market requires not only 
accumulation but also manipulation. Now to go back. The 
leading financiers of the country, the so-called insiders, are in 
closest touch with the money situation. They are also in close 
touch with the mercantile situation. They can detect changes 
whether favorable or unfavorable, almost immediately. They 
can also act on such changes immediately. On the other hand, 
it takes time for the effect of a substantial change in conditions 
underlying money and business to reach the general public. 
They are, therefore, not aware that the change has taken 
place. Meanwhile accumulation or distribution in the stock 
market has taken place and the resulting manipulation is a 


8 The Search f or Bargains 

reflection of actual conditions, as seen by the insiders, although 
the general public can only guess. 

Hence, when these changed conditions do become apparent 
to all, the mind reverts to the fact that some months ago the 
stock market indicated just such a change. It discounted it. 
Stock market discounting, then, is a reality to the average 
investor or merchant. The reason that its forecasting action, 
so called, is so accurate is that it is based on knowledge and not 
guess-work. An appreciation of this fact by any merchant 
should impress on him the value of the stock market as a guide 
to conditions. 

The Human Element 

The great majority of people are followers, not leaders. 
Most people like to imitate, at the same time preserving some 
degree of personal independence. Naturally, the leaders surge 
to the front in finance and industry. They shortly become 
''insiders.” They are, therefore, the first to feel any changes in 
conditions either for improvement or decline. Naturally, they 
are in an excellent position to take immediate advantage of 
such conditions. A favorable condition develops, for example: 
They become very active, accumulate securities, and later on give 
out optimistic statements. As their predictions are confirmed, 
the general public, who, it must be remembered, love to imitate 
and follow, speculate on the more favorable outlook now visible, 
and prices soar. If the first step taken by the general public 
proves remunerative, as in 1915, the tendency is to enlarge 
operations. Buying and selling, on a larger scale than there was 
any intention of originally, develops. This is the situation at 
the top of a boom. 

Right at this point, let us remember that, from the standpoint 
of the average investor, the stock market discounts, that adverse 
business conditions are not obvious to him for a number of 
months after the first actual indications have appeared. It is, 
therefore, quite clear that, even as the first unfavorable factors 
are developing, the general public continues to over-speculate 


Why Stock Market Bargains Occur 9 

and over-extend. But slowly and surely the weight of the dis¬ 
tribution of securities by the insiders, who are aware of the 
change, has its effect on the market. A sharp decline may ensue, 
but the early months of any change in the trend of security prices 
is punctuated with vigorous cross-movements (rallies or breaks 
as the case may be). As a result, a large proportion of investors 
or speculators fight these changed conditions hoping against 
hope that the change, which has not yet, let us remember, found 
a corresponding change in business, will be but temporary. 
Finally, the change in the market finds reflection in the com¬ 
mercial world and business commences to decline, commodities 
also. 

It finally becomes fully apparent that the conditions in 
industry are bad and going to get worse. Fear then seizes the 
average business man and investor. Securities and goods are 
sacrificed at whatever prices are obtainable. This in many 
cases precipitates a panic, and in a majority of cases, a crisis or 
a period of readjustment. 

This human weakness, this inclination to follow rather than 
lead, or at least act independently, is the real reason why we find 
the majority of business men and investors wildly enthusiastic 
At the peak of a boom and abnormally depressed during the 
ensuing readjustment. Instead of remembering the law of 
action and reaction, of anticipating, they follow the news made 
for them. Those who anticipate and prepare for the coming 
changes by studying the operations of the insiders, are those who 
get ahead of the crowd. 

How to Benefit From These Conditions 

It must be apparent from what has been said that, to take 
advantage of these conditions, requires individual thought and 
an ability to stand alone. This is perhaps more essential during 
a period of prosperity than at any other time.' The majority of 
people are optimistic. The pessimistic factors which develop 
underneath the surface in a period of prosperity, as outlined 
above, are naturally not published for public consumption. 


10 


The Search for Bargains 


Minor difficulties are glossed over, only the booming condition 
of business is pointed out. The first direct evidences of reaction 
do not come for six to twelve months’ after such a reaction 
begins, depending on whether industrial companies furnish six or 
twelve months’ statements. 

It is useless to attempt to follow industrial activity. There 
are two factors, however, which can be followed easily and which 
are apparent to those who are able and willing to keep their heads 
and not be lead away by the optimism of the crowd. These, as 
we have pointed out before, are the condition of the money 
market and a consideration of the technical action of the market, 
as illustrated through a study of volumes made clear in our 
textbook “The Technical Position of the Market.” 

Dear money alone does not necessarily spell danger. Dear 
money, accompanied by a rapid decrease in the reserve ratio 
of our Federal Reserve Banks, spells danger. A study of volumes 
is one of the quickest and surest ways to benefit from the attitude 
of the majority of speculators. Heavy volumes, million-share- 
day after million-share-day, are clearly the result of manipulation 
and designed to excite the cupidity of the public. They also 
show the presence of the public in the market to an overwhelming 
degree. Never, in the entire history of stock market cycles, 
has this matter of volumes failed to be a valuable guide. 

In the fall of 1916, with apparently no cloud in the sky, 
with war prosperity unexampled, all an individual needed to 
guide him in reaching a decision to liquidate his securities 
was the unprecedented volumes of October and November of 
that year. ^Again in the fall of 1919, when everybody was 
extraordinary optimistic, volumes week after week ran between 
7,000,000 and 8,000,000 shares. Contrast this with conditions of 
January, February, and March, 1915, when the market was 
low. Average daily volumes at that time were around 500,000 
shares, average weekly volumes under 3,000,000 shares, some¬ 
times under 2,500,000. Contrast it again with the conditions 
of January and February, 1919. While pessimism was promi¬ 
nent at that time, based on an expected immediate readjustment, 
as we will outline later in this chapter, it could readily have 


Why Stock Market Bargains Occur 11 

been seen by any one who kept a clear mind that the pessimism 
which was so widespread was not being reflected in liquidation 
of securities, because, here again, the average daily transactions 
were less than 500,000 shares. 

We have given this slight digression here because it is so 
absolutely necessary for the successful investor to consider 
the technical action of the market as well as the fundamental 
developments of the business cycle. With this in mind let us 
consider briefly the post-war inflation and its subsequent deflation. 


A Study of the Years 1919 and 1920 

A practical application of these factors has nowhere been 
more vivid and more exacting than in the markets that followed 
the signing of the armistice. The armistice was followed by a 
general readjustment in security prices, due to the belief that 
the end of war demands would see a shrinking margin of profit. 
If we look back to the winter of 1918-19, we will recollect that 
this belief was not disputed by the insiders. January and 
February, 1919, found many dire predictions in regard to the 
business and labor situation. Little was said at that time about 
the inflation that had been injected into our currency or the fact 
that the great majority of people had more money than ever 
before, and that our farmers in particular were very prosperous. 

In the early months of 1919, however, this condition was 
indicated by the ability of many of our industries, notably 
luxury industries, to withstand the readjustment that then pre¬ 
vailed in the copper and other basic industries. While the 
general investing public was still pessimistic over the general 
situation the insiders noted this development. The stock market, 
grew strong, under the leadership of the automobile and other 
luxury stocks. By the late summer the luxury-buying public 
had spread its unreasoning purchases to clothing, shoes, silk 
shirts, etc. The securities of these various industries rose to a 
high level. They thoroughly discounted the situation. Indus¬ 
tries were running day and night, however, and optimistic pre¬ 
dictions abounded. The result was that, although a security 


12 


The Search for Bargains 


like American Woolen Common had advanced from a level of 
45 J early in the year to 140, the public appetite carried the stock 
to levels of above 160. 

In other words, the human element of greed, of something for 
nothing, dominated the situation. It was felt that buying stocks, 
under such conditions, was a way of getting rich quick. Such 
purchases could not have been based on reason. They totally 
ignored the basic law of which we have been speaking — action 
and reaction — they forgot that any large buying movement 
must, according to this law, be followed by an opposite movement 
of extraordinary retrenchment. 

In October, 1919, the Federal Reserve Board, gave the indi¬ 
cations of a fly in the ointment. Many of us remember Governor 
Harding’s first warnings. They were received with contempt 
and, mark you, with the greatest contempt centered in the 
business rather than the financial world. In November, the 
stock market broke badly but steadied in December. Reports 
sent out over the year end were mostly optimistic and carried 
the idea that the recession in the stock market was due to the 
attitude of the Federal Reserve Board and not to general indus¬ 
trial conditions. The discerning investor realized, however, that 
no market that could lose one-third of its total rise so quickly 
was fundamentally sound. 

A further slump in February, 1920, was followed by a marked 
rise in April, based on a favorable decision by the Supreme 
Court as regards stock dividends. This was quite illustrative 
of the wide reserve movements that occur in the early stages of 
any change in the broad trend of the market. 

Stock Dividends 

This factor of stock dividends is sufficiently important to 
merit a brief discussion at this time. It must be remembered 
that the bull market of 1919 was largely built on the pent-up 
enthusiasm of the war period and the fact that people had so 
much money in their pockets, in other words, on the prevalence 
of inflation. The reaction of this situation on the mind of the 


Why Stock Market Bargains Occur 13 

public was to give them a feeling of extraordinary prosperity 
when it did not really exist. Was it, therefore, not natural that 
under such conditions stock market manipulators should use any 
fantasy possible to aid in the distribution of securities, in this 
case — stock dividends? 

If it had not been for the fact the Supreme Court decision on 
the taxability of stock dividends was held up until early 1920, we 
would probably have had a tremendous outpouring of such 
dividends in the fall of 1919. As it was, insiders were forced to 
wait. Nevertheless, these distributions were seized upon to give 
the market its quickest and largest rally in the entire down¬ 
ward movement of 1920. This occurred at a time, let us re¬ 
member, when business had not begun to feel the effects of the 
adverse fundamental developments of 1919. 

The hollowness of these distributions can be appreciated 
when it is considered that/a stock dividend adds absolutely 
nothing to one’s wealth. Ii a company is capitalized for $10,- 
000,000 (100,000 shares at $100) and the capitalization is 

increased to 200,000 shares, (100,000 shares given as a stock 
dividend) it is quite evident that the selling value of the total 
stock will be just half its previous value. Nothing is added. 
The only possible gain would be to continue the same dividend 
distribution on twice the amount of shares. It is to be noted, 
however, that the instances in which this has been done, since 
the period of stock dividend distributions, have been rare. We 
feel confident in saying, therefore, that this development was 
simply an additional bubble among the other bubbles of the 
post-war period and was for the purpose of maintaining the 
buying of a wildly speculative public. 

Conditions Grow Worse 

The silk collapse which began in Japan early in 1920 was ex¬ 
plained away with little thought. Similar conditions soon de¬ 
veloped in the leather industry. By the middle of the summer, 
prices had commenced to fall steadily and the industries that 
were so profitable in 1919 were particularly hard hit. Already 


14 


The Search for Bargains 


the price readjustment had spread to basic materials, cotton, 
copper and food products, and the public began to appreciate 
that the decline in the stock market which began November, 1919, 
had clearly indicated the development of such business conditions 
as followed. 

With the sharp decline of November, 1920, the feeling of fear, 
which we have spoken of, took possession of the great majority 
of people. The business man was having all he could do to 
establish his credit and take care of his business. As a result 
every one hastened to turn into cash that most liquid commodity 
of all — stocks. The closing days of November, 1920, found the 
holdings of speculative securities at the lowest levels in years, 
found pessimism rampant, found little indication on the part of 
the public to make any new commitments. In other words, 
the personal reaction from the optimism of 1919 had become 
just as marked, if not more so, than the reaction in security prices. 
A period of depression was upon us. 

The Opportunities of 1921 

After the-culmination of the rapid decline of the fall and 
early winter of 1920, the market had a natural rebound, cul¬ 
minating in a series of million-share-days in late April and early 
May, 1921. In this recovery one of the outstanding features 
was the continued tightness in money, due to the tremendous 
amount of so-called frozen credit throughout the country. The 
subsequent period of reaction was therefore quite justified. 

In the depressions and crises of 1900-20, the business man 
had been but little disturbed by declining prices. These crises 
had been largely the result of the using up of the available 
credit supply, and, under our banking system as it existed in 
those days, this called for a quick liquidation and paying up 
of loans. In the crisis of 1920-21, as pointed out, the Reserve 
Banks stood in the breach. The difficulties were not financial, 
they were trading difficulties, born to a considerable extent 
in the over-production of the War period and the unusually high 
•level to which commodity prices had risen. 


Why Stock Market Bargains Occur 15 

As a result, even when the financial atmosphere was 
relatively clear, it was found very difficult to liquidate loans 
made on goods. Trading was dull and liquidation was a slow 
process. As a result, it was seen, during the months of April 
and May, 1921, that trade, rather than following the improve¬ 
ment in the stock market, was continually growing worse. 
Hence, there followed another period of severe liquidation, cul¬ 
minating in the months of June and August, 1921. By the 
latter month, however, liquidation both of stocks and goods had 
proceeded to such an extent that money grew rapidly cheaper. 
The prices of sound investment issues began to advance rapidly, 
on top of the small improvement that had already taken place. 
It was possible, just as it is always possible in the late phases of 
any period of prosperity, to purchase sound bonds on a specula¬ 
tive basis and obtain material profit. 

This completion of liquidation and ease in money was shortly 
reflected in an improvement in the stock market, although 
during the major portion of 1921 there was practically no indica¬ 
tion of improvement in industry. Here again, therefore, it took 
vision and an unusual amount of courage and patience on the 
part of investors to step into the market and acquire the bar¬ 
gains prevailing. 

Never was pessimism more rampant than during the Summer 
of 1921. In accordance with the law of action and reaction, 
iust as this pessimism was so unusual so was the resulting improve¬ 
ment in the stock market. From August, 1921; to April, 1922, 
the market advanced with practically no interruption. This 
advance amounted to over thirty points on the part of the 
industrials, at least 50% advance over the level from which 
the advance started. The advance in the railroads from August 
to early 1922, while less marked, amounted again to between 
40% and 50% of the selling levels from which this advance 
started. 

The improvement of 1922 was based on two solid foundations, 
first, unusually favorable money conditions, second, increased 
construction activity — the result of the lack of these activities 
and the derth of new building in the years 1915 to 1919. Due 


16 


The Search for Bargains 


to the over-production in many lines, particularly luxury lines, 
and some of our basic metals, the recovery in trade in 1922 was 
very spotty. The railroad equipment companies which, since 
1916, had received very meager orders, were benefited materially 
by an improvement in railroad conditions under theEsch-Cum- 
mins legislation which allowed the railroads once again to renew 
their equipment buying. As a result, the general business 
recovery was not as broad as usual, in spite of the large stock 
market advance as shown previously. 

The railroads and public utilities, for reasons given in subse¬ 
quent chapters in this book — namely, lower money rates, 
lower wages and lower commodity prices — benefited to a great 
extent and their securities, in many cases, doubled. The 
securities of corporations related to construction and railroad 
activities benefited tremendously, iron and steel, for example, 
while securities catering to public needs also advanced based on 
an irreducible public necessity. On the other hand, while the 
securities of industries dependent upon the prosperity of the 
farmer, upon foreign trade, and upon luxury buying, improved 
somewhat with the general market, their improvement was 
spasmodic and not as sustained as in other fields. 

We had in the improvement of 1922 one of the greatest exam¬ 
ples that we have perhaps ever seen of the workings of the laws 
given in the first two paragraphs of this chapter. The prosperity 
of the period was largely confined to those industries and activi¬ 
ties of human life that had not been benefited by the unusual 
prosperity of the preceding five years. Those industries and 
activities that had prospered unduly from these former condi¬ 
tions were still suffering a reaction from the extraordinary war 
era. 

This brief resume of the stock market developments following 
the armistice, while still fresh in many minds, should, we think, 
give sufficient indication of the fallacy of blindly following the 
crowd. It further shows why, just as long as people continue 
to speculate and invest without knowledge of the laws under¬ 
lying the development of our periods of action and reaction, the 
far-sighted, who follow such laws closely, will continue to obtain 


Why Stock Market Bargains Occur 17 

extraordinary bargain opportunities in the stock market from 
time to time. It is equally evident that, with our present rate 
of growth and our present tendency to overdo, such opportunities, 
will occur with surprising frequency. In subsequent chapters, 
we will show how to judge these individual bargain opportunities 
and how to take advantage of them. 




CHAPTER II 


CHANGE AND INTERCHANGE 

A Critical Period 

We are living in an extraordinary period of the world’s 
history. So many basic changes in world conditions never were 
and probably never will be again crowded into so few years. 
Such conditions make the building up of one’s surplus funds 
more difficult. For example, if we could feel that the great social 
changes that have come about in the past four years had shown us 
what definite path we were to follow, the situation would be 
clearer. Of this much we can be sure. The investor or specu¬ 
lator has got to take into consideration the growth of organized 
labor and the probability that for a number of years, if not 
permanently, labor will consume a greater proportion of the 
operating expenses of our great industries than ever before. We 
must recognize and bear in mind the increasing clamor against 
great wealth. This, it seems to us, will have the effect of causing 
the re-investment of large profits within a company itself rather 
than their distribution in extra dividends. From a broader view¬ 
point, it probably means the gradual elimination of abnormal 
profits. 

Another factor of prime importance is the question of the 
future level of prices. Speaking roughly, for over twenty years, 
we have been working on a constantly advancing level of com¬ 
modity prices. Up to 1910 this advance was very slow. In the 
five years 1915-20 it was very rapid. We are now passing 
through the periods of inflation, readjustment, and hesitation 
that follow all great wars. After these are ended it is doubtless 
true that we will enter a prolonged period of declining prices. 
The immediate point of interest, however, is that it is a constant 
changing in conditions that make the situation most difficult. 

From 1910 to 1920 a merchant or investor could have banked 


Change and Interchange 


19 


on a persistent advance in prices. The year 1920 saw the first 
marked reversal. Yet, a study of previous post-war periods 
convinces us that we will not immediately turn into a prolonged 
declining movement for commodity prices. For a few years we 
will do business and speculate on a level of prices between the 
extremes of the pre-war period and the early post-war period. 
Commodity prices must be watched closer in such a period than 
at any other time. Yielding to depression and hesitation on 
account of sharp declines in commodities will doubtless find us 
standing on the side lines while we watch securities and com¬ 
modities turn about and improve rapidly. Was it not so in the 
fall of 1921? In other words, the investor and speculator for a 
number of years must keep his mind in a state of flux, particu¬ 
larly as regards commodity price movements. 

Political Developments Important 

Another feature of the situation that will bear watching in 
the future is the development of political conditions. The elec¬ 
tion of 1920 marked a considerable reversal in the public attitude 
as against that which prevailed during the war period. Some 
have said it marked the triumph of reaction and stand-pattism. 
However that may be, the political developments of the years 
1920-24 should have more than ordinary weight in the mind 
of every speculator and investor. Each political move of con¬ 
sequence must be noted and studied, not alone for its immediate 
effect, but because in a period of such rapidly changing social 
and commodity price conditions, political developments can do 
much to retard or improve the progress of the country. 

To help us under such conditions we can learn much from 
history. Some have said that history never repeats. It is 
doubtless true that, detail for detail, no action is ever repeated 
exactly. Nowhere, however, can history be studied to better 
advantage than in the stock market. We have pointed out that 
the changing conditions existing have shown in many respects 
that the present is unlike any previous period. At the same 
time we feel that much is to be gained in diagnosing the future 


20 The S e ar ch f o r B ar gain s 

through a consideration of the conditions of action and reaction 
in this country over a period of years. 

Crises of the Past One Hundred Years 

In the United States, the most important crises or panics 
have occurred in the following years: The first important panic 
of which we have record took place in 1812. Then followed a 
period of six years of prosperity up to the panic of 1818. The 
next period was seven years, a panic occurring in 1825; then 
twelve years to 1837; ten years to 1847; ten years to 1857, and 
twelve years to 1869. From then on the time between panics 
of importance shortened. We had a very severe panic in 1873, 
in four years more a secondary crisis, 1877. Then followed an 
interval of seven years before the difficulties of 1884. We had 
another crisis in 1890, six years later; a most severe panic, 1893; 
a secondary reaction in 1897, four years later. Then came our 
undigested securities panic of 1903, six years later. Our financial 
panic of 1907 came in four years and then followed our war 
panic of 1914. In 1917 we had a stock market crisis, although 
it could hardly be termed a panic, while the same may be said of 
the year 1920. 

From these figures certain features stand out. Crises or 
panics are apparently becoming more frequent. It is probable 
that there were minor depressions between the years 1825-37 
and 1857-69, for example, but they are not recorded in history 
as of great importance. But perhaps the stock market crisis of 
1917 will not be so recorded in years to come. 

At the same time, it is doubtless true that, in the future, 
we may continue to look for crises more frequently than in the 
past. As the country becomes more settled, this development 
should become marked. If we study the financial history of 
England for the past fifty years, we find that the following 
difference exists between its financial history and our own: 
Crises occurred more frequently over there although the severity 
of their crises was much less than ours. This is but natural. A 
young and rapidly growing country can carry on, so to speak, 


Change and Interchange 


21 


for a longer time than an older and more stable country, but 
when the reaction'comes, it is naturally much more violent, both 
because the period of prosperity has been longer and more intense 
and because the country is less stabilized. 


Declining vs. Advancing Prices 

There is one very important feature that needs tobe brought 
out. Let us remember that from the years 1870-72 to the 
years 1895-97 we were in a period of declining commodity prices. 
Just what went on in that period is well illustrated by considera¬ 
tion of prices of steel rails. In 1867 steel rails were selling at 
$166 a ton. Then started a prolonged decline. With sharp 
rallies from time to time, particularly in the year 1872, the price 
of steel rails declined rather persistently, reaching an average 
level of $42.25 in 1878. In 1879 a turn came. Rails sold up 
to an average level of $48.25 and in 1880 sold at $67.50 a ton. 

This sharp rise was like a sharp reaction in a prolonged bear 
market. It did not last long and by 1885 steel rails had reached 
an average level of $28.50 a ton. In 1886 another turn came 
which carried the average level to $34.50 a ton. From then on, 
however, renewed weakness set in which carried the average to 
$17.62 a ton in 1898. 

Now let us look for a moment at the panics of this period. 
We experienced them in 1869, 1873, 1877, 1884, 1890, 1893, and 
1897. It can be readily seen, without further explanation, that 
they occurred much more frequently than in any previous period. 
Moreover, let us note that, during the period 1867-78, in 
which the price decline was the largest, and which covered only 
eleven years, we had three panics. 

The period 1879-88 covered what may be termed a time 
of relative improvement in a prolonged commodity price decline. 
It is true that commodity prices, as shown by steel rails, fell to 
new low averages, but the period was punctuated by a greater 
stability in price movements and more frequent improvement. 
In 1888, however, we entered another period of difficulties, both 
monetary and business, and declining prices. In this period we 


22 


The Search for Bargains 


find the panics of 1890, 1893, 1897. We think that this is 
enough to show that, taking into consideration the normal ten¬ 
dency of crises or panics to become more frequent, though less 
severe, as the country becomes more stable, it is apparent, under 
falling commodity prices, we must prepare for shorter relative 
periods of prosperity and more frequent periods of depression. 

Action and Reaction Since 1900 

Like the consideration of the crises and depressions of the 
past one hundred years, we can gain some benefits from a closer 
consideration of the developments above and below the line of 
normal growth in this country for the last twenty years. Starting 
with 1900, and excepting the minor interruption of the Northern 
Pacific corner in 1901, a broad bull market continued through 
1902, culminating in the collapse of 1903-04. This collapse was 
called the undigested securities panic. The two previous years 
had seen the formation of many large industrial combinations 
and the floating of securities on an unprecedented scale. It 
was only natural, therefore, that, with reaction in industry, 
these securities should decline precipitately. 

Difficulties were short-lived, however, and were followed by a 
broad upward movement which culminated in December, 1906. 
At that time money was very tight and business generally over¬ 
extended. This resulted in the very sharp collapse of 1907. 
The financial difficulties of 1907, as we pointed out before, were 
severe, although both industry and the market recovered quickly, 
and entered a two-year bull movement, culminating in 1909. 

For the next five years we witnessed a somewhat irregular 
movement in the stock market. It declined to July, 1910. Then 
followed what has been termed by many, the sunshine movement. 
It was recognized that fundamentals underlying finance and 
business were not satisfactory, but the slogan was sent out that 
the difficulties were largely imaginary and if everybody would 
forget it, everything would be all right. The net result of this 
was a somewhat inconsequential market movement over the 
next year. In the spring of 1912, it became apparent that crops 


Change and Interchange 23 

were going to be very satisfactory. This gave the foundation 
for a bull movement which did not culminate until the fall. 
It was followed by a very swift and sharp reaction in 1913. A 
feeble rally ensued followed by another drastic downward move¬ 
ment in early 1914. This last move was the result of European 
developments, coupled with the domestic tariff situation. 

The War Markets 

After a most severe fall and winter we started on a prolonged 
upward movement which did not culminate until the fall of 1916. 
Then followed a one-year bear market to December, 1917. A 
somewhat inconsequential upward movement developed in 1918, 
followed by a sharp rise in 1919, then the bear market of 1920-21. 

The situation here outlined, is, of course, apparent from an 
examination of the numerous plots and grafts available to any 
investor. We have shown it here, however, to bring into relief 
a long-pull method of trading that is much commented on lately. 
That is, taking advantage of the so-called two years’ bull market 
swing and one-year bear market. As is shown above, it is true 
that, speaking broadly, we have experienced this condition 
stock marketwise ever since 1900. Does that necessarily mean 
that this situation will continue? We hardly think so. 

We want to refer to the opening paragraph in this chapter. 
We must remember that, for twenty years or more, we have 
been moving rather steadily in one direction, that we are 
now in a period of change. When we pass through this 
period of readjustment we will undoubtedly enter one quite 
different from that extending from 1900-20. Are there, then, 
good grounds for believing that we can look at the regular 
developments of the years 1900-20 for our guide? We think 
not. 

Advent of Federal Reserve System 

Probably no development in this country in the last fifty 
years has had a more far-reaching effect than the institution of 
the Federal Reserve Banking System. Under pre-war conditions, 


24 The Search for Bargains 

with our old National Banking System and scattered reserves, 
we were constantly experiencing drastic money pinches. We 
have only to go back to the periods 1907, and 1913-14 to see 
this situation. While it is true that the Federal Reserve System 
was put in operation in 1914 it was not in a sufficiently well- 
organized working position to assist greatly at that time. In 
1907 occurred the large banking failures in New York City, the 
passing of the Aldrich-Vreeland Act to issue emergency currency 
and the stamping of all checks payable only through the clearing 
house. 

In such periods we suffered from the following conditions: 
When a marked recession in the demand for goods developed, 
and manufacturers and retailers became tied up with large in¬ 
ventories, the banks, being in an isolated and individual position, 
not only were not able to assist but started calling loans, right 
and left, in an endeavor to protect themselves. Hence, at a 
time, when increased credit was most essential we got a reduction 
in credit available. This condition was responsible for the years 
1907 and 1914 standing out, in our financial history, as years of 
major panic. 

On the other hand, let us take the developments in 1917 and 
1920. The decline in securities of all types in 1917 was caused 
by the widespread liquidation due to our entrance into the war 
and the inevitable competition of government bonds, and to the 
fact that the institution of a war basis for the country meant a 
marked revision in industrial profits. It is notable that, all 
during this' decline, the question of monetary and financial 
difficulties was secondary,'whereas, as we pointed out above, in 
previous periods, these difficulties were primary. 

The year 1920 is even more interesting. Here was a year 
in which the difficulties were largely a question of credit. For 
years we had gone on extending our capacity, doing business on 
an ever-increasing scale but with less capital and more credit. 
Under our old banking system this would probably have con¬ 
tinued until the entire credit structure collapsed. The Federal 
Reserve System, controlling, to a large extent at least, the entire 
credit structure of the country, put on the brakes in late 1919 


Change and Interchange 


25 


and restricted credit for all except essential purposes early in 
the year 1920. 

What was the result? When, in the fall, under rapidly de¬ 
clining commodity prices it was urgently necessary to extend 
credit to certain essential industries to help them over the diffi¬ 
culties, we found the Federal Reserve Banks in a position to 
render help where sorely needed. How different from former 
periods of crisis! What was the result? While the stock market 
naturally declined, reflecting the shrinking inventories and 
resultant losses by the majority of our industries, at no time was 
there a question of a financial panic and at all times the Federal 
Reserve Banks were in control of the situation. 

The lesson in these developments is that we have entered 
a new era in banking. The bargain hunter, while assured of 
frequent opportunities, must not expect to see a repetition of the 
acute financial stress that accompanied former periods of busi¬ 
ness difficulties. He must take this development into considera¬ 
tion in making purchases during depression periods. 

The Future 

While, therefore, we see that a study of the past is illumin¬ 
ating in some particulars, we must remember that the future is 
not an open book but rather an uncharted sea. Of prime im¬ 
portance, in the consideration of the future is a study of the long- 
swing trend of commodity prices. Again, the developments of 
the past five years have forced us to consider the railroads, public 
utilities and industrials as individual types of securities and not 
a composite stock market whole. 

Under the conditions that we face, the profits of industrial 
enterprises are bound to decline. This is true, not only because 
it will be difficult to lower operating expenses in keeping with 
lower prices but also because our industrial capacity has increased 
so tremendously. Another factor that we have got to face is the 
extension of government regulation. Although the cry under 
prosperous conditions is for the elimination of the Government 
from business, we have only to refer to 1920 to find that, under 


26 


The Search for Bargains 


periods of depression, the cry is for government assistance. 
While it is likely that the Government will neither stay out of 
business entirely nor enter it whole-heartedly, developments from 
now on will have to take government regulation into account. 

We now have government regulation of our railroads. 
Railroad rates have been fixed so as to give a return of 5f % on 
the property investment, if possible. This return is allowed 
after reasonable expenses and efficient management. Who is to 
determine that development? Is it not likely, as time goes on, 
particularly if the railroads have difficulty in making the pro¬ 
posed earnings under the rates allowed them, that the govern¬ 
mental bodies will look into the situation of railroad expenses? 
In other words, if any section of business operates on what is, to 
a large extent, a service-at-cost plan, under the direction of the 
Government, is it not quite probable that much attention will be 
paid to costs? 

Moreover, we will go further than this. Let us point 
out that the wide application of government regulation, which 
now extends over our public utilities, is largely a develop¬ 
ment of the past ten years. While the rates we pay on street 
railways and steam railways are regulated, the price that we 
pay for the necessities of life go unregulated. Will this continue? 
Understand us, we are not arguing as to whether prices should 
be regulated or not; we are not arguing as to whether the law of 
supply and demand is, as is claimed by many, the best regulator 
of all, (we are inclined to think so) but we want to point out the 
possibilities that exist. With the probability of the extension of 
government regulation, based on recent social and political 
developments, we feel it quite possible if not probable, that such 
regulation will enter the industrial field. What this will mean 
to the investor and speculator can best be appreciated by thinking 
what it has meant over the past ten years to railroads and 
utilities. It is going to make considerable difference in the 
future when considering “stock market bargains.” Bearing it 
in mind, let us go on to see what really constitutes a “funda¬ 
mentally sound bargain” in the stock market. 


CHAPTER III 


LOOKING FOR BARGAINS 

What Do We Want to Do? 

One of the foremost reasons why many people are unsuccess¬ 
ful in handling and building up their surplus funds is that they 
really do not know what they want to do. They realize that 
they wish to make more money, but they have no definite plan 
outlined or in mind. The result is that they fluctuate from 
investment to speculative-investment, then on to pure speculation. 
If unsuccessful they go back again to investment. Thus, they 
get nowhere. 

Investment funds must be handled differently from specula¬ 
tive funds. The three types of purchases outlined above should 
be kept distinct. By that we do not mean that an individual 
must make up his mind at the start whether he desires to invest 
or speculate with his funds and then stick entirely to either one or 
the other. A man may naturally wish to divide his funds, using a 
portion conservatively. With the balance he is willing to take 
considerable risk. He must, however, be sure to invest with the 
funds that he places aside for conservatism. Many people 
think they are investing when, in reality, a large amount of 
speculation is involved in their purchases. It is quite essential 
to success, therefore, to establish definitely the goal in mind. 
Then the individual can decide whether it can be reached through 
conservative investment, or through speculation. When he has 
made up his mind about that it is equally essential to see that his 
investments do not become speculations. 

What is a Real Investment? 

In our text on “Investment Securities” we gave our reasons 
for feeling that bonds were an ideal investment. We also 


28 


Th e Search for Bargains 


showed that preferred stocks, surrounded with restrictions and 
not preceded by any considerable amount of bonds, should prove 
quite satisfactory. Common stocks, even of old established 
companies, should not be considered as investments. Why is this 
so? When you invest, your first consideration is security; 
second, income; last, appreciation. You want to put your 
money where it is safe, where you can get it readily if possible. 
Banks will take it and pay you a return of four or five per cent, 
annually, but you know they loan it at a higher rate and you 
want the benefit of those higher rates. But mark you, we said 
banks loaned their money; they do not go into partnership. 
When you invest, you should have this same quality in mind. 
You should take a lien, a mortgage on property, which for a safe 
investment, should have a value at least double the amount of 
indebtedness outstanding against it. 

It is true that sometimes banks make unfortunate invest¬ 
ments. In a -period of declining commodity prices, banks 
sometimes are forced to take a loss on loans made on com¬ 
modities. Similarly, industrial, railroad, or public utility 
enterprises sometimes run into unexpected difficulties, as for 
example, the New York Tractions, and the lender of money to 
them (the bond holder) is not able to sell out at one hundred 
cents on the dollar. In all these situations, however, the lender 
can not only take the collateral behind the loan for payment, if 
necessary, but he can also fall back on the credit of the borrower. 
If, therefore, any individual decides to invest, say one-third of 
his funds, (to place them for safety and income) he should buy 
only bonds. While preferred stocks are sometimes good invest¬ 
ments, as pointed out in other parts of the course, they can not be 
considered as high a type of security to hold as one which carries 
a direct lien against the assets of the borrower. 

What is a Speculative-Investment? 

The words “speculative-investment” have been considerably 
abused. A more correct title would be an investment-specula¬ 
tion. But custom has built it opposite. The word “invest- 


Looking for Bargains 


29 


ment”, when used in connection with the word “speculation”, 
signifies little except the receiving of income. The investment 
end of a speculative-investment arises from the fact that the 
speculation returns an income while it is being held for appre¬ 
ciation. 

Preferred stocks should rarely, except after reorganizations, be 
considered speculative-investments. A preferred stock should be 
strong enough to purchase for the income and security or it should 
be let alone. On the other hand, after reorganization, preferred 
stocks sometimes sell below their true value, while giving a high 
return. An example is the 6% preferred stock of the reorgan¬ 
ized Rock Island Railway which could have been bought below 
60, with probability of continued dividends and price apprecia¬ 
tions. The point we want to bring out is that a speculative-in¬ 
vestment should be considered solely as a speculation giving 
income, and not as an investment for safety. 

Atchison, paying 6% and selling at 80, cannot be considered 
an investment in the true sense of the word. The purchaser of 
Atchison common at 80 buys a share in the partnership of the 
company at 20% below its par value. He goes into partnership; 
he does not lend money. Atchison is bought at 80 because it is 
considered cheap. The fact that it pays over 7% on the purchase 
price, while one is waiting for the improvement expected makes 
it a doubly attractive speTiTTtation. Such a transaction must, 
however, being the purchase of a share in the partnership, be 
considered in the light of a speculation, and not an investment. 

What is a Speculation? 

The word “speculation” has many meanings. In some 
quarters the word “speculation” has come to be synonymous 
with the word “gambling”. This is wrong. Speculation is 
intelligent anticipation; gambling is betting. The abuse of 
“speculation” has come through the efforts of many people to 
take advantage of the minor fluctuations in the stock market. 
This is in reality gambling. Minor fluctuations do not mean 
anything. Any one who tries to guess and to act on daily market 


30 


The Search for Bargains 


movements is absolutely certain to lose his shirt in the long run. 
No one knows what stocks are going to do from day to day. On 
the other hand, as was pointed out in our text on “Industrial 
Securities” every business enterprise passes through a period of 
youth, manhood, and old age. During the period of youth, a 
business enterprise is quite similar to the individual. It is apt 
to have many trials and its success may fluctuate first one way 
and then another. In other words, it is not stabilized. Such 
conditions form a sound basis for intelligent speculation. Secu¬ 
rities of such companies are naturally on a relatively low price 
level reflecting the y&rly efforts of the enterprise. The ability 
to diagnose the future of such an enterprise from a study of 
business, financial and individual conditions forms the basis of 
sound speculation. 

A Specific Illustration 

No better illustration of this is available than the recent 
history of the Corn Products Refining Company. As late as 
1916, this stock fluctuated between 13-30; in 1917 it sold between 
18-37. What did the company manufacture? It manufactured 
food substitutes in large part. Moreover, it was in a position 
to increase its manufacture of such substitutes if necessary. 
High prices for foodstuffs followed the breakdown of European 
production and our entrance into the war. Here was the 
opportunity for this company and for speculation in its stock. 

The American Can Company is a similar instance. This prop¬ 
erty, obviously heavily capitalized at organization, went limp¬ 
ing along for years. In 1910, however, the practice of canning 
goods and distributing greater and greater amounts of eatables 
in containers grew rapidly. This development, the organizers of 
the company, doubtless, had in mind years before, but even 
after the development became apparent, it was possible to pur¬ 
chase the stock below $25 a share. In our first period of war 
prosperity, the company benefited greatly. 

The same situation develops frequently in the railroad field. 
The greatest speculative opportunities of the last twenty-five 


Looking for Bargains 


31 


years were offered in Union Pacific, and Atchison after re¬ 
organization. A real speculation, therefore, to our mind, em¬ 
bodies a relatively low selling level, coupled with the probability 
of growth due to the development of conditions favorable to the 
individual property. 

Low Priced Issues 

All this brings us to another point which is perhaps of greater i 
importance than any we have outlined. Intelligent speculation 
is based on buying outright, or at least paying a large proportion 
of the purchase price — never, in buying on a ten-point margin. 
Buying low priced stocks, under such conditions, takes much 
less money to obtain the same percentage of profit. For illus¬ 
tration, the money used to buy ten shares of Union Pacific would 
buy ten shares of Southern Railway, ten shares of Missouri 
Pacific, ten shares of Rock Island, ten shares of St. Louis South¬ 
western and ten shares of Kansas City Southern. 

If the Union Pacific was bought at 125 the return on the 
purchase would be 8%. Such a purchase would be termed a 
speculative-investment. On the low priced stocks no income 
would be received at all, but fifty shares of stock could be bought 
for the same outlay as ten shares. A bull market that would 
bring an increase in price of 50% in Union Pacific (or a rise of 60 
points) would in all probability, bring a rise one-half as great in 
the low priced stocks mentioned. If it did, the money used 
would double, speaking roughly. The increase in the money 
placed in Union Pacific would be 50% plus an annual income of 
8%. Provided that the speculation in the low priced stocks is, 
therefore, made with intelligence, as outlined, the profit possi¬ 
bilities are much greater than in the so-called speculative- 
investment. Hence, an additional argument for either speculat¬ 
ing or investing, rather than mixing the two. 

Why Stocks are not Investment Bargains 

We have shown previously that the ideal investment is a 
bond, from the standpoint of having a lien on the property, or, 


32 


The Search for Bargains 


in other words, being secured. Let us consider this situation 
from another angle. Take the hypothetical case of Corn 
Products. Prior to 1918 there was little or no thought of paying 
a dividend on the common stock. The ownership of it was con¬ 
centrated in a few hands. The energy of these people was di¬ 
rected in building up the company. For what reason? In order 
to make their stock holdings valuable. Recent developments 
show how well they succeeded. Profits can only be tajcen by 
distributing the stock to the public, however. 

As the company enters a more stabilized stage of existence it 
is quite possible that dividends of six, seven, or eight per cent 
may be paid year after year. Under such a development, Corn 
Products would become known as a company that has for years 
paid regular dividends on its common stock. This to many 
minds would mean that the stock had become an investment. 
But the reader will appreciate that it could really be only a 
speculative-investment. Under such conditions the stock would 
become more and more desired by many and the holdings would 
become more and more scattered. Sales of the stock to supply 
purchasers must come from the sources that formerly held it so 
widely. In other words, the general stock buying public are 
becoming the partners in that enterprise in the place of the old 
holders. But the new partners are not the managers. This is 
hardly a satisfactory situation for what many people like to call 
an investment of money. We do not argue that such an enter¬ 
prise may not be successful but we do think that common-sense 
reasoning indicates that if the owners of any property are to allow 
that property to be administered by trustees, which is really what 
would go on in the case suggested, they should have a greater 
degree of security than is offered by common stocks, if they are 
to consider themselves investors and not speculators. As 
there is no way to obtain this, we cannot consider common 
stock issues as offering genuine investment bargains. 

Margin Trading 

We have referred to buying stocks outright. Looking for 
bargains whether in the investment or speculative field supposes 


Looking for Bargains 33 

the purchase of securities based on expectations of constantly 
growing strength. Investment purchases are always made 
outright because the purchase is primarily to obtain income. In 
speculation, many people are prone to try to not only pick up 
speculative bargains when conditions warrant but try to buy 
them at the lowest prices possible. 

Russell Sage once said he made his money taking the inside 
24 in the yard stick. What did he mean? Never trying to 
buy at the extreme bottom or sell at the extreme top but to get a 
good proportion of any movement. 

Let us refer again to the development of the Corn Products' 
Co. From 1907 to 1915 Corn Products common sold below $10 a 
share in every year. It would, indeed, have been a far-sighted 
individual who would have predicted in those days that in 1917— 
1920 food prices would be extraordinarily high and Corn Products 
benefit greatly thereby. Such a situation was apparent in 1917, 
however. Then Corn Products could have been purchased 
between 15-20. Here would be a case of buying a stock 100% 
above the low levels of previous years, yet it would have been 
very profitable if the stock had subsequently been sold even 30 
points below its high prices. 

Let us suppose that such purchase had been made at $20 a 
share. Anyone, feeling confident of advancing commodity 
prices and the developments to follow might have gone ahead 
and purchased the stock on a five-point margin. He might have 
reasoned that five points was 20% of the purchase price, and surely 
20% was as high a protection as a broker would want. We have 
shown what the developments were ahead of Corn Products. 
These developments happened to come without any interruption. 
If, however, Germany had been able to terrorize our country in 
the early part of the war as she did England, such terrorization 
might have been the cause of many a sharp slump in security 
prices. The buyer of Corn Products at 20, on margin, probably 
would have lost his security under such conditions in spite of his 
correct diagnosis. If further illustration of the possibility of 
unforeseen unfavorable developments is needed, let us take the 
bull market of 1915-16. During the spring months of 1915 


34 


The Search for Bargains 


many stocks were offered at prices which later proved to be 
almost absurd. Yet the purchaser of any of these stocks on a 
ten-point margin would have lost his money in the break that 
followed the sinking of the Lusitania in May. Similarly in 1916, 
after the market had risen for some time, submarine scares, 
coupled with a weak technical position, brought about a sudden 
reaction of from fifteen to twenty points in some of the strongest 
issues. Again the margin trader would have lost, while an 
outright purchase would have carried him to big profits later in 
the year. 

If, therefore, we agree that speculative bargains are to be 
found among the lower priced issues of the relatively younger 
properties, with great possibilities of growth, we can say that 
the purchase of such stocks outright should be more profitable 
and involve less risk than the purchase of the so-called speculative- 
investments on a margin account. If any individual feels the 
necessity of obtaining a return on his purchase while engaged in 
speculation and hence desires speculative-investment purchases, 
the illustrations of the possible sharp reversals that might take 
place without warning, against the trend of financial or business 
conditions, is sufficient to show the necessity of putting up at 
least 50% margins if one expects to carry the choice of speculative- 
investments to a satisfactory profit. 

How to Analyze Industrial Earnings Statements 

Having taken up the question of the difference between 
invesl ment, speculative-investment and speculation, having 
shown why stocks are not investment bargains, and having 
pointed out the disasters of margin trading, except when entered 
into on a very liberal protective basis, we think it would be 
valuable to show how carefully an industrial earnings statement 
must be scrutinized and how it must be correlated with the 
balance sheet. 

Industrial earnings statements without a balance sheet are 
of little value because in an industrial company working capital 
is the all important factor. When a company reports earnings 


L o ok in g f o r B ar gain s 35 

of $2,000,000, for example, this may or may not mean that the 
company has earned $2,000,000 in cash. A common error into 
which many investors fall is the error of believing that all pub¬ 
lished earnings are cash earnings. 

They are not cash earnings, necessarily, for a number of 
.reasons. Two reasons we will give, that are clear, and will be 
quite evident. If a company is carrying its Land, Buildings, 
Machinery, etc., at $20,000,000 and it re-values them at the 
end of the year at $24,000,000, surplus, if no other values are 
disturbed, will increase $4,000,000. Moreover, this increase 
may or may not appear as earnings, as desired. It can be made 
to appear so if it is desired to have it. In fact, in a different 
way this occured many times during the War period. If a 
company bought $1,000,000 worth of leather, and, by the end of 
the year the leather had increased in value to $1,500,000, it was 
not uncommon for it to appear in the company’s balance sheet at 
the increased value, and the $500,000 increase to appear as 
earnings for that year. 

Theoretically, there is little criticism in this case because, of 
course, inventories are current assets and a part of working 
capital. At any rate, the criticism would be much less than if 
the property account was marked up. The difficulty lies in th^ 
fact, however, that, as we have previously pointed out, industrial 
values are seldom permanent and an increase in property account, 
or an increase in inventory account, occasioned by advancing 
prices must always be revised, subsequently. As a matter of 
fact this revision is what caused material suffering among 
industrial companies in the post-war readjustment. 

Another reason why earnings reported may not mean an 
equivalent improvement in cash or working capital is that a 
portion of the earnings may be turned back into the plant. 
In fact this is practically necessary in every industrial establish¬ 
ment, if it is to be kept in excellent working condition. While 
earnings, so used, improve the property and result in larger 
subsequent earnings, if properly used, they cannot be con¬ 
sidered as earnings available for distribution to the stock¬ 
holders. 


\ 


36 


The Search for Bargains 


In the last analysis, if you are examining an earnings state¬ 
ment of your company as a stockholder, what you are interested 
in is the amount of earnings that is available for payment of 
interest and for distribution as dividends on the stocks. For 
that reason it is essential for every investor to determine what 
proportion of the net earnings shown by the company in which 
he is interested is carried forward as working capital. In other 
words, what is kept as current assets available for future distri¬ 
bution. 

The way to check this up is through working capital position. 
For example, if a company reports net earnings of $2,000,000 
after interest, but does not declare any dividends on the stock 
and if these earnings are actual cash earnings they should appear 
in the balance sheet at the end of the year either as an increase 
of $2,000,000 in current assets or a decrease of $2,000,000 in 
current liabilities. We think this should be absolutely clear. 
That this is not always so is apparent from one illustration we 
will give. 

The Fisk Rubber Company for the twelve months, ended 
June 30, 1922, showed a net profit of about $3,000,000. A 
consideration of its balance sheet showed that on June 30, 1922, 
as compared with June 30, 1921, the company’s inventories had 
declined about $5,700,000, its accounts and notes receivable were 
nearly $1,000,000 less, while i€s cash had increased only about 
$450,000, a net loss in current assets of over $6,000,000. If 
the $3,000,000 had been cash earnings available for stockholders, 
the company’s current liabilities would necessarily show a 
decrease corresponding to the decrease in current assets plus the 
$3,000,000 earnings or a total decrease of over $9,000,000. 

We find that on June 30,1922,Loans Payable were $7,045,000 
compared with $15,050,000 the year before, a decrease of 
$8,000,000, but Accounts Payable showed an increase of over 
$450,000 so that the company instead of showing a decrease of 
$9,000,000 in its current liabilities showed an actual decrease of 
about $8,000,000 as $430,000 bonds were retired. In other words, 
as far as working capital was concerned the company was only 
'$2,000,000 better off than at the end of the preceding year, 


Looking for Bargains 


37 


although from the published earnings statements showing a net 
profit of $3,000,000 we can see that, if these were actual cash 
earnings kept in the treasury, the decrease in liabilities should 
have been just that much greater than the decrease in assets. 

The foregoing indicates clearly, we think, why this com¬ 
parison should be made. Paper earnings are of no value to 
stockholders. In this case, either $1,000,000 of the $3,000,000 
had been put back into plant, or had been diverted into channels 
where it was not immediately available to stockholders as 
working capital. If a company does not at least maintain its 
working capital position, favorable published earnings mean 
little, as it is out of working capital that dividends must be paid. 

With this added feature of industrial analysis before us, we 
can now turn to a brief discussion of the various types of stock 
market movements that we face in the future. 




CHAPTER IV 


STOCK MARKET MOVEMENTS 

Distinct Types 

Some may say that there are innumerable types of stock 
market moves. For the purpose of the conservative speculator, 
however, the distinct types of market moves may be distin¬ 
guished in three ways: First, is the market movement caused by 
the business cycle. This is the type of movement that has 
given rise to the statements over the past few years that we have 
a two years’ upward trend and one-year downward trend with 
regularity. This type of movement consists of months of 
accumulation, ensuing months of manipulation, and approxi¬ 
mately six months of distribution. 

The second type of stock market move we should consider 
is the one based on the price cycle. It is not as distinct as those 
based on the business cycle and acts over a series of years. It is 
vitally important, however, as under an upward movement in 
prices, one type of security forms the best speculative bargain, 
under a downward price movement, a different type. 

The third type of stock market move is the so-called inter¬ 
mediary move or what might be more correctly termed the 
yearly fluctuations in the market. These are due somewhat to 
seasonal activity and to the technical position of the market. 

The Business Cycle Movement 

As we have pointed out previously, in this text, both finance 
and business undergo periods of action and reaction in which we 
first build above our line of normal growth and then fall below 
it. Business progresses in rather regular cycles. These cycles 
* are only regular as to time when they develop under the same 


Stock Market Movements 


39 


type of price cycle. For example, the time consumed by a 
complete business cycle is apt to be quite different if business is 
operating on a falling commodity price level than if operating 
on a rising price level. 

Let us start with that stage in the business cycle in which we 
find financial depression. Under these conditions, money is 
naturally abundant owing to stagnation in industry. Stocks 
are at low levels as prevailing business conditions have been 
discounted. The first ray of light, so to speak, is seen in an 
improving bond market. This is natural. Bonds are invest¬ 
ments and their market level is governed more by interest rates 
and prices, which are then low, than by fluctuations in earning 
power. Nevertheless, bonds will not improve in price until the 
acute difficulties of a financial or business crisis have passed and 
we are well into the depression period. When such an improve¬ 
ment does start in, it is followed within a few months by a 
corresponding speculative improvement, first in the price of 
speculative-investments and second in the lower-price specula¬ 
tive issues. 

The Second and Third Stages 

We now enter the second stage of the cycle. In this stage 
we find commercial activities increasing and money in somewhat 
better demand, due to that development. Stocks, both specu¬ 
lative-investment and speculative, show much strength and the 
bond market is very active and strong. This period, it might be 
noted in passing, is undoubtedly the best period of all for the 
financing of corporations. The public is in a happy frame of 
mind and money has not yet become dear. 

As business develops rapidly and the money surplus that has 
piled up is drawn on, we find many optimistic predictions and 
many more new enterprises floated. This is the third period of 
the business cycle. It is a period in which public activity in 
the stock market is greater than at any other time. Entrance 
into the market under these conditions may prove profitable if 
small profits are accepted, but stock market bargains have gone. 


40 The S ear ch f o r B a r gain s 

Turning the Corner 

We next enter a period of full flood-tide in business. Manu¬ 
facturing companies are working at full capacity, labor is well 
employed, and speculation is rampant. But, underneath it all, 
banking reserves show a diminishing tendency. The absorption 
of capital by new promotions continues very heavy and money 
rates advance considerably. This is the situation that prevailed 
n the early fall months of 1919. 

From a stock market standpoint, surface conditions continue 
to look favorable. It may be noted , however , that the conditions 
that first showed improvement in the period of depression — money 
and banking — are the first to show reverses. The force that 
really started the entire movement was cheap money. Cheap 
money has not only disappeared, but dear money has come 
into existence. This is a danger signal. 

Under a few months of such conditions, banks become 
apprehensive, with continued drain on the money market. 
Credit is restricted. The stock market, being the most sensitive 
barometer, reflects this changed condition by a decline of con¬ 
siderable proportions. Business has not yet fallen off percep¬ 
tibly, but in financial quarters a more conservative feeling is 
shown. This was clearly indicated to the stock market specu¬ 
lator by the rise in money rates and the decline in bank condi¬ 
tions, published weekly. The cycle has started on the down 
grade. Once started the movement develops rapidly and, as 
in 1920, before it is hardly realized, we are in a period of financial 
stress and depression. 

Finally, industrial stagnation again releases money. The 
securities market is again at a low level and the entire process is 
repeated. As we stated above, the time required for the com¬ 
pletion of a cycle of this type depends on whether we are operat¬ 
ing on a gradual rising or gradual falling plane of prices. The 
actual time consumed is not of as much importance, however, 
as the ability to recognize the different stages. Bargains are 
available only in periods of inactivity and depression. Stocks 
should be sold while business is still booming. The signal of 


Stock Market Movements 


41 


changing conditions is given by the money market and the 
general banking situation. 

The Price Cycle 

Some of our readers may be somewhat confused by this 
term. We have used it to designate that very long and slow 
movement up and down that has characterized the average 
level of prices in this country for years. For illustration, after 
the inflation of the Civil War period, commodity prices started 
on a long downward movement which did not culminate until 
the period 1893-98. Since that time the tendency has been up. 
Prior to the Civil War the tendency was up for about twenty 
years. 

Owing to war conditions, we have recently had an extraor¬ 
dinary illustration of what marked fluctuations in the price level 
mean to business. Stock marketwise, the divergent trends of 
railroad and industrial securities since 1910, indicates the im¬ 
portance of the price situation as we will show later. It has 
been claimed in some quarters that government regulation and 
bad financial management has had much to do with the down 
trend of railroad securities. The point may be made, however, 
that the first allegation is partly true, and that the second was 
as prevalent in the years of railroad prosperity as the years of 
railroad difficulties. War conditions only intensified a develop¬ 
ment that had been underway for some time. 

Changing Conditions 

As we are now in a period of flux or readjustment, the study 
of a probable average price movement of coming years is of 
major importance. In 1919 many contended that we were on a 
permanent high price level. With the readjustment of 1920 
this' contention was no longer made. While it is undoubtedly 
folly to expect prices to fall to and to stay at pre-war levels, 
there is a great probability, deduced from a study of past finan¬ 
cial history and a study of post-war developments, that over the 
next twenty to twenty-five years we will operate on a gradually 


42 T h e S e a r c h f o r B a r g a i n s 

declining price level. What this means has been discussed in 
other parts of the text. 

We are here chiefly concerned with the question of what 
type of securities should be bought during depressions in the 
business cycle, recognizing this probable development. It is 
apparent that if industrial companies were benefited to an 
extraordinary degree from sharply rising prices they will not be 
benefited by a period of downward price trend. Conditions of 
1915-20, from an industrial standpoint, were extraordinary. 
They are gone, probably not to return for a great many years. 
If we will get this fact fixed in our minds it will save us many 
disappointments. This is not to say that our industrial com¬ 
panies will not continue to earn good profits. Those companies 
that have handled their surplus funds well and have built up 
their property from earnings rather than by borrowing, will 
have a good earning capacity with no greater capital. But, 
the huge profits that prevailed in 1915-20 were a result of 
restricted competition to a large degree. In a period in which 
the trend of prices is downward, it is much more difficult to 
control costs. Moreover, competition is bound to be much 
more severe. 

Editor’s Note: This was written in 1920 and remains unchanged in 
subsequent editions. 


Utility Operations Should Improve 

On the other hand, the developments of the years 1915-20 
were very hard for the railroads and other public utilities. 
Although they received certain rate increases, the fruits of these 
will not be experienced in full degree until a lower ratio of 
operating expense develops through lower costs for materials 
purchased. There is another important point here. Industrial 
companies for years not only benefited by favorable price con¬ 
ditions but also by the fact that charges to them for service 
rendered by our utilities was very low. In the future, it is quite 
likely that such service will be rendered at higher levels than 
before, when compared with the relative selling level of industrial 


Stock Market Movements 


43 


products. Furthermore, as we have pointed out before, labor 
will probably consume a higher portion of industrial expenses. 

The outlook over a series of years, therefore, undoubtedly 
favors the operation, from a profit standpoint, of the railroads 
and utilities, just as the outlook in 1910, from the profit stand¬ 
point was favorable to the industrials. Do not misunderstand 
us. We are now discussing the price cycle that operates over 
a long period of years. The predictions we are making should 
not be expected to materialize tomorrow or next year. 

For a number of years industrial securities should often look 
attractive as speculations. Their fluctuations will undoubtedly 
be broad and they will lead many upward movements. But for 
the person who is looking for stock market bargains and whose 
concern is not only to speculate but to conservatively build up 
surplus funds, we are calling attention to certain fundamentals 
underneath industrial securities that suggest the possibility of 
developments, in that period covered by the next downward 
trend price, similar to those that have taken place in railroads 
and public utilities in the upward price cycle. 

Yearly Fluctuations 

Yearly fluctuations might otherwise be described as inter¬ 
mediary movements. If we go back to 1900, we will note that 
practically all the culminations of bull movements in the market 
came in the fall months — from October to December. Look at 
the years 1919, 1916, 1912, 1909. Similarly bear markets have 
culminated in the fall months. Look at 1917, 1914 (the low of 
the gutter market was made in October), and 1907. 

Students of the technical position of the market and even 
students of the long swings of the market are prone to speak of 
what they term double bottoms and double tops. For example, 
when a long downward move ends, a sharp rally ensues. The 
statement is then often made that stocks will again sell around 
the first low levels before any permanent change in the trend 
takes place. These conclusions are doubtless true from a broad 
standpoint. Such action, at the end of a decline, may be said to 
be due to the fact that support by the banking interests on the 


44 


The Search f or Bargains 


first decline causes re-sales of stocks so bought on the sharp rally. 
This naturally brings reaction and dulness. 

To say, however, that opportunities for obtaining bargains are 
as good on, what is termed, the second bottom as during the period 
of extreme liquidation is hardly true. It is noticeable that in 
the years we have spoken of as illustrations of bear markets 
culminating in the fall, these secondary bottoms have occurred 
in the early months of the following years, namely 1918,1915,1908. 

There are fundamental reasons why these turning points in 
the market come when they do. First, take the culmination of bear 
movements. It is natural that the greatest pressure of liquida¬ 
tion is experienced in the fall. We would not have declining 
security prices and other adverse conditions unless the general 
money situation was strained. In the fall months money is 
required on a large scale for agriculture. Rates are high—under 
adverse conditions—very high. Business men, unable to obtain 
accommodation, are forced to sell securities. Hence, under 
unfavorable conditions, selling pressures become tremendous 
during the fall months. 

Some improvement takes place over the first of the year, due 
to large dividend disbursements and the improving year-end busi¬ 
ness. With the turn of the year, however, we enter the months 
of seasonal dulness in trade, late January and February. Money 
is cheaper but it is bonds not speculations, as we have pointed 
out, that are favorably affected. Speculative securities are still 
under the pall of declining profits. Hence, at this time another 
buying opportunity occurs. Under normal conditions we 
generally experience the so-called spring rise. This is assisted 
by cheap money, good planting outlook, and reflects increasing 
business activities. Some reaction may occur as a reflection of 
seasonal midsummer dulness. 

But, in the normal bull year, trading commences to pick up in 
the early fall months. It is natural, under favorable monetary 
and business conditions that this should be the season of greatest 
activity marketwise. With business good, with good crops being 
harvested, with profits increasing, it is essentially a favorable 
period for great activity and distribution of securities. 


Stock Market Movements 


45 


Hence, from the standpoint of yearly fluctuations, we find 
our buying opportunities during a bull move in February and 
July or August. Our selling points often come in early May and 
most always in the fall. In a bear movement, buying oppor¬ 
tunities occur in February and in the fall, while sales on rallies 
are usually advisable in the spring and late summer. 







CHAPTER V 


MAKING MONEY IN THE STOCK MARKET . 

What Brings Speculative Success? 

We have now outlined for you the close relation that the 
stock market bears to all the actions and reactions of life; the 
reason why the majority of investors feel that the stock market 
discounts; and, we have given a brief study of what may be 
termed the rise and fall of the post-war inflationary “spree” of 
the American people. You have seen the developments of the 
crises and depressions since 1900. You have seen with what 
regularity crises have occurred in this country in the past one 
hundred years and why they should continue with equal regu¬ 
larity over ensuing years. 

We believe we have pointed out to you clearly the distinction 
between Investment, Speculative-Investment, and Speculation. 
We have intended to show why, when a man invests his money, 
he should not be content to be a partner in an enterprise but 
should be a lender of money, looking always first to security, 
second to return, with possible appreciation a minor matter. 

You are aware that success in speculation depends upon 
taking advantage of the various cycles of prosperity and depres¬ 
sion. We have shown you why low priced securities of companies 
that may be expected to develop rapidly over ensuing years 
are much preferable, as speculations, to other issues that may 
have paid dividends for a number of years — the so-called sound 
dividend paying stocks. 

We have likewise tried to make clear the drastic change 
in fundamental conditions that has taken place in the post-war 
inflationary period and the readjustment period that followed. 
This is not a minor change and it may seem at times to be set 
aside. Yet, it will not be. Under constantly advancing com¬ 
modity prices it is inexorable that the margin of profits in 


Making Money in the Stock Markets 

industrial enterprises constantly widen, because selling prices 
always tend to rise faster than operating costs, one of the major 
factors of which is labor. On the other hand, we have seen in the 
readjustment period of 1921 and 1922 how difficult it is to 
readjust costs in keeping with the readjustment in selling price. 
Just as labor follows advancing prices slowly, just so it follows 
declining prices. The result is that the margin of profit in indus¬ 
trial enterprises narrows perceptibly. Public Utility companies 
on the other hand, and even Railroads, operating under a more or 
less fixed plane of selling prices, benefit from conditions that 
bring gradually lower costs for basic commodities and labor. 

The net result of this condition, from the standpoint of 
security holders, has never been more clearly set forth, we think, 
than in the chart taken from the Wall Street Journal given on 
the following page. This shows the relative activity of railroad 
and industrial securities during a period of advancing commodity 
prices. It will be noted that, in the years 1900 to 1910, railroads 
stocks amounted to over 70% of the total transactions on the 
New York Stock Exchange, on which trading this chart is based. 
This unusual activity was the result of constant distribution 
of these securities to the public, as the “Insiders”, well realizing 
the difficulties that faced the railroads, were at that time rapidly 
selling such issues as St. Paul, New Haven, Rock Island, St. 
Louis San Francisco and many other stocks of roads which 
experienced extreme difficulties during the war period. 

At the same time, industrial stocks were consuming only 
30% of the active trading. The public was not vitally interested. 
Yet anyone can realize now that, during the years 1900 to 1910, 
industrial securities were constantly accumulated in anticipation 
of the favorable developments that would follow from a period 
of advancing commodity prices. At that time such issues as 
American Can, Corn Products, American Locomotive, United 
States Industrial Alcohol and others were available below $25 a 
share. Yet, how many bought and held them? 

What do we find under conditions that brought avast indus¬ 
trial prosperity? Exactly the reverse. When these same 
industrial stocks mentioned were selling from $60 to $125 a 



CftprrfrM By DOW, JQMSS & CO. 1923 




























































































































































































































































































































Making Money in the Stock Market 49 

share, or even higher, industrial activity on the New York Stock 
Exchange was such that industrial securities amounted to 80% 
of the total transactions. When the railroads, above mentioned, 
on the other hand, had declined to levels which recognized 
re-organization or in the case of St. Paul to levels below $25 a 
share, trading in railroad securities had dwindled to less than 
20% of the total. 

There is a lesson here that all investors should keep before 
them. This is another illustration of the law of change and 
inter-change, which we discussed in Chapter I of this book. 
Nothing is permanent in the field of finance. The securities 
that are most active, that are most buoyant, that “look the 
best” in the stock market, are most always, it is subsequently 
found, facing a drastic change in condition. Securities that 
are neglected, apparently — neglected at least from the public 
standpoint — often become the investment stocks of the ensuing 
years. There is no saying so true in Wall Street as this: “ The 
values of tomorrow are most often found in the scrap heaps of today — 
the values of today frequently become the scrap heaps of tomorrow .” 

With these facts carefully imbedded in our minds, let us go 
on to a consideration of the most important factor in speculative 
success. 

“Character” —A Most Important Ingredient 

“Speculative success depends as much on the character of 
the speculator as on the knowledge of how to win.” One of the 
greatest reasons for so much misfortune in the handling of 
surplus funds is the desire of most men to “get-rich-quick.” 
Undoubtedly one of the reasons for this is the portrayal by 
magazines, newspapers, and other periodicals, of the extra¬ 
ordinary success of a very few people in the stock market. The 
success of these people not being truly portrayed, is often laid to 
luck. The result is that many men enter Wall Street in a frame 
of mind such as the following. “I am going to try my luck. If 
I win well and good.” 

Any one who has read our textbooks carefully, knows now 


50 


The Search for Bargains 


clearly, that speculative success is far from being a game of luck. 
It requires study and perseverance. 

It is unfortunate, but true, that men are controlled 80% 
by emotion and only 20% by reason. Thisds clearly illustrated if 
we but stop and consider the various methods and schools of 
salesmanship in vogue. The majority of them lay particular 
stress on the psychology of selling, which action, in' many 
instances, simply resolves itself to a question of the best method 
of appealing to the emotion of the purchaser. The average, 
investor should bear this constantly in mind, should remember 
that emotion is something that everyone must constantly guard 
against. 

It is easy to go with the crowd. It is much easier to be a 
follower than a leader. It is difficult to stand alone in a period 
like 1919 when industry is booming, when the majority of people 
are riding around in newly acquired automobiles and as far 
as business and the stock market goes, to use the vernacular — 
‘‘The sky is the limit.” Yet, the ability to do this is absolutely 
essential to speculative success. It must be clear, that if 90% 
of speculators lose money in the stock market, those who desire 
success must be numbered in the 10%. To be in the 10% class, 
it is necessary to go opposite the crowd and not with it. 

This is equally essential in periods of depression. During 
such periods, most everyone we meet feels blue, down at the 
mouth, can see little ahead. It is at that time that a little 
vision, a little courage and an ability to stand alone, pays such 
big dividends. Perhaps that was never clearer illustrated than 
in the year, 1921. The country has probably never faced greater 
complications, a heavy over-production of goods, unusually 
unsettled and appalling conditions in Europe, the greatest 
number of failures recorded in years. Yet, from the law of 
change and inter-change, the man who had vision, who believed 
in his country, and was willing to believe that such conditions 
would be overcome, was the man who was rewarded in the 
improvement of 1922. 

To do these things, to stand alone, to have vision, to have 
courage and yet be able to be pessimistic when the majority 


Making Money in the Stock Market 51 


are optimistic, is character. It must be developed for specula¬ 
tive success. 

A Second Essential 

“Then abides faith, hope and charity, but the greatest of 
these is charity.” This is the keystone of our moral life. 
“Courage, self-reliance and patience, but the greatest of these is 
patience.” This is the keystone of speculative success. The 
reason that patience is so necessary is because it is perhaps the 
most essential feature in stock market developments and because, 
being a rare quality, it is the quality on which the so-called 
“Insiders” work. 

Most men are impatient. This is one of the reasons why they 
desire to “get-rich-quick.” It has been said, and with much 
truth, that 95% of us are as mentally lazy as we dare to be. 
Impatiently, we try to get something for nothing. It can’t 
be done. If we will just consider briefly, how the securities 
market is built, we can see how essential patience is. First, let 
us consider the shorter stock market cycles. The majority of 
people feel that the stock market moves constantly. Nothing is 
farther from the truth. Probably nine months, at the least, out 
of every twelve, is spent in preparation rather than execution. 
In 1920, for example, the stock market did little or nothing from 
May until early November. It ran on a relatively even keel. 
Then, in about five weeks, it declined drastically, the result of the 
distribution that had been in progress under the surface of the 
desultory movements of that six months period . 

This is equally true in the developments over a period of 
years. We have spoken above of the rise in Corn Products and 
American Can in the years 1910-20. Few realize that practi¬ 
cally the entire period of 1900 to 1910 was spent in building up 
and strengthening these companies, diversifying their produc¬ 
tion and getting them in a position where they were bound to 
benefit quickly and materially from such a development in 
industrial conditions as occurred with the beginning of 1915. 

Accumulation of securities is practically always accomplished 


52 


The Search for Bargains 


under disappointing conditions. The ability to continue with 
courage and faith to hold securities purchased during such 
periods, brings its own reward. Having the courage of one’s 
convictions and entering the market during periods of depression, 
the battle is only half won. The patience to wait for the devel¬ 
opments counted on and anticipated is the other half. 

The Correct Mental Attitude 

Speculation should be entered upon as a profession by but few. 
To make a profession out of speculation requires the closest 
study of the minor fluctuations of securities and daily application 
to the problem in hand. This calls for attendance in brokerage 
offices and constant scrutiny of the tape. The equipment 
necessary for success here is so difficult to obtain and so exacting 
that the ordinary business man or investor should not attempt 
to attain it. Yet, recognizing this fact, many assume a mental 
attitude toward the securities market similar to the attitude of a 
professional bettor or tipster that one would ordinarily expect to 
find only at a race track. They want something doing every 
minute. 

There are times when, having taken profits, the market should 
be practically ignored as a basis for commitments. It is just as 
essential to have an ability to stay out of the market, when a 
study of general fundamental conditions shows that the situation 
contains little opportunity for substantial profits, as it is to have 
the courage to get into it. Yet, we have had clients write us.in 
answer to our requests for them to take this attitude: “How 
can we expect to make money in the stock market if we are not in 
it”? The answer is simple. Making money in the stock 
market is not solely a question of action. It is largely a question 
of study and prepaiation. The periods of study and preparation 
must necessarily consume a much greater length of time than 
periods of action. 

Trading from day to day or week to week in a broker’s 
office, brings losses and only losses to the great majority of 
people. To some, it is exciting and exhilarating, but seldom 


Making Money in the Stock Market 53 

profitable. Believing that you are looking for profits, for 
success, and not for excitement, the best place to study and 
thoroughly analyze stock market conditions is as far away 
from the stock market ticker as you can get. 

Have a Goal — Try to Attain It 

In the last analysis, success in the stock market is but little 
different from success in business, or success in life. The reason 
that so few men are really successful is because they spend the 
most of their time floundering about, having no definite objective. 
One of the tragedies of life is that so many of us become relatively 
old before we realize how much a direct objective in life means. 
We do not intend to sermonize on life. That is not our purpose. 
Yet, it is exactly the same in the handling of money. The 
average man does not make up his mind exactly what risks he is in 
a position to take and is willing to assume for an objective desired. 

We urge all to map out a definite plan for the building up of 
their surplus funds. We advise against such a plan having as its 
basis the desire to become wealthy. More men become wealthy 
by beginning on a basis, the accomplishment of which promises 
financial independence, than on a basis which had for its objective 
the making of $1,000,000. Money returning about 25% annually 
builds up with astonishing rapidity. When we stop and consider 
that only $200 invested to return 50% a year amounts to over 
$11,000 in ten years, it is readily appreciated what a conserva¬ 
tive objective may bring to a man young in life. 

One of the greatest misfortunes is for a man who has attained 
his objective, let us say to make 25% a year, to fail to restrain 
his desires, but to argue with himself that having made 25% so 
quickly, there is no reason why he should not go on and make 
50% or 100% or even 250% by foregoing a conservative attitude 
and by investing, let us say, two or three times as heavily and as 
vigorously as he originally planned. 

There is a saying in business "Nothing succeeds like success”. 
This is true in part in the stock market but equally untrue. It 
is true in that success gives greater capital and greater oppor¬ 
tunities. It is untrue because success in the stock market is 


54 


The Search for Bargains 


unbalancing, even to men of strong mentality. The majority 
of investors are prone to fall into the error of believing that if 
they had been able to make 50% on their capital, conserva¬ 
tively, they have only to accept a greater degree of risk and 
increase the return one hundred to two hundred fold. The 
average man should become more conservative, rather than less 
conservative, as his profits accumulate. He should retain 
constantly before him the path that he has laid out, the steps 
that he expected to take in the beginning to attain the goal 
desired. He should have the courage and self reliance to stick 
to the path he has laid out, irrespective of how attractive imme¬ 
diate prospects may seem. 

Confine Purchases to Seasoned Securities 

One of the most fundamental requisites in successful specula¬ 
tion is to know thoroughly, not only the position of business, the 
position of the business cycle, but also the security purchased. 
In our various textbooks on Railroads, Industrials, Mining and 
Oil Securities we have outlined certain individual features which 
should be used to check up the different types of securities. 

One general point may be made. That is, the avoidance of 
new securities, the new flotations that accompany nearly every 
period of prosperity. Few of these are successful commitments, 
from a speculative standpoint. A purchaser of them at the 
time of flotation seldom receives an acceptable speculative 
profit. Certainly profits from such purchases are not in the 
majority, in fact, they are in a decided minority. Yet, there are 
just enough of them to whet the public attitude, so that, in many 
cases, a large speculation in issues of this type develops. 

Most corporations, when put together, are either over¬ 
capitalized, from the standpoint of immediate stock market 
values, or are inadequately supplied with working capital. This, 
of course, applies mostly to industrial corporations, although it 
has been true in some instances in the Rails and Public Utilities. 

As we noted in our textbook on “Industrial Securities” 
practically all industrial companies have stages of growth quite 


Making Money in the Stock Market 55 

comparable to the stages of growth in human nature — youth, 
manhood maturity and old age. During youth they must be 
nursed, they must be supplied with financial assistance and 
many problems must be met and overcome. Until these prob¬ 
lems are surmounted, their securities are apt to be very poor 
opportunities for profitable speculation. 

We have spoken above of the development of American Can 
and Corn Products in the period 1900 to 1910. During these 
years the vicissitudes of these corporations were great. Skillful 
management brought them through these difficulties into virile 
organizations, but they were not speculative bargains when first 
formed, but only after they had been carefully nursed for years. 

The United States Steel Corporation is one of the best 
illustrations of this situation. Organized in the early 1900’s, 
its common stock was distributed to the public during a period of 
prosperity at levels of $40 a share, or above. This was accom¬ 
plished by unusually favorable forecasts of the future for a large 
corporation of this character. Yet, the developments of the 
immediate future showed the necessity of building up greater 
values behind the stocks of this corporation, and the common 
stock, originally distributed at $40 and above, was available in 
later depressions below $10 a share. It is during the depression 
periods of stock market and business cycles that the “water,” 
so-called, is squeezed out of the majority of new corporations. 
These are the times the conditions that give us real speculative 
opportunities, not the conditions attending the flotation of such 
enterprises. 

From what has been said above, we think it is clear that, in 
the last analysis, each individual must be the judge and jury of 
his own actions. This is why we have laid so much stress on the 
development of these essential characteristics. Having devel¬ 
oped them, you have acquired the ability to stand on your own 
feet and think for yourself. Thereafter the “art of right think¬ 
ing” is another and all important factor in speculative success. 
This we discuss briefly in the following chapter. 


CHAPTER VI 


THE ART OF RIGHT THINKING 
“Skill is acquired by knowledge and experience .” 

Vital Points in Success 

The purpose of this Complete Educational Course has been 
to give you that knowledge necessary to develop your financial 
skill. As we showed you in the beginning, it is not so much 
what a man earns, as what he does with his money after he 
gets it, that either makes him independent in the later years 
of his life or dependent upon someone for support. 

Knowledge is the foundation on which you build; experience 
is the mill in which your knowledge is ground up. Whether 
you attain your objective in life or not depends on how you use 
the knowledge now gained. Financial independence will not 
come without thought and study and planning. 

In successful speculation, speculative-investing, or even 
investing, an ability to interpret the attitude of “the crowd” is 
valuable. For illustration, we have shown you time and again 
that 85% of those who speculate or invest fail. Why? Because 
they follow blindly instead of standing on their own feet. There¬ 
fore, a willingness and ability to go opposite “the crowd”, partic¬ 
ularly in times of tremendous prosperity or engulfing depression, 
is very valuable. 

One of the greatest deterents to the building up of financial 
independence is greed — the desire to get rich quick. Specu¬ 
lation, to be successful over a series of years, must carry with it 
a definite objective carefully worked out and calmly chosen 
through reason and not through greed. Once chosen, the most 
necessary item, in the personal make-up, is patience. Attaining 
financial independence is a matter of gradual building up rather 
than continuous search for a gold mine. 

“A get-rich-quick man always pays for his speed." 


The Art of Right Thinking 57 

Most important of all, perhaps, is the development of self- 
reliance. More and more, those seeking financial independence 
are beset by tremendous amounts of financial literature. Some 
of this is good, some purposely put out to mislead, some is 
thoughtlessly written. All must be considered carefully and 
weighed in the light of one’s own financial knowledge. A 
typical illustration of the non-use of self-reliance will perhaps in¬ 
dicate exactly what we mean. A business man of good judg¬ 
ment is considering placing certain funds in speculation. He 
studies over the situation for a number of days, picks out certain 
securities and considers them from all angles with which he is 
familiar. Then, instead of going directly to his broker and 
buying, he takes the list and submits it to others for inspection. 
These, his broker or his friends, naturally have a tremendous 
amount of detail to their own work and are able to give it only a 
cursory examination. Can their opinion, even in the light of 
much experience, be as valuable, from a cursory examination, 
as the deductions of one who has accumulated financial knowl¬ 
edge and turned the matter over in his mind for days and days? 
This is not. to say that no value can be obtained through asking 
the opinion of one’s broker or banker. Such opinion should 
not be accepted as over-balancing hours of individual study. 
Self-reliance must be developed. 

What is a Fortune? 

This question has really never been, and probably never will 
be answered. What would be a fortune to a working man, is 
nothing to the millionaire. You may say, of course not— the 
millionaire has a fortune. If you ask the millionaire, however, 
he would not agree with you. He is still striving for a greater 
thing. A fortune seems to be a mysterious amount of money 
which many endeavor to obtain, but which, as it is approached, 
seems to increase in amount the nearer we get to it. The great 
majority of people inwardly desire to accumulate a fortune, but 
how many realize what they are seeking? Have they placed a 
definite object in view? 


58 The S ear ch f o r B ar gain s 

What is Financial Independence? 

This question can be answered clearly. To be financially 
independent, is to have a sum of money sufficiently large so 
that, if it is safely invested, it will produce an income sufficient 
to insure one the necessities of life. In other words, to be finan¬ 
cially independent, means to be able to live comfortably without 
labor. 

The distinction between these two objectives is great. This 
Course is given you to enable you to become financially inde¬ 
pendent. Chasing after a fortune entails the taking of large 
risks for a possible large profit. The acquiring of a financial 
independence entails care, systematic saving, conservative 
speculation and investing, patience, and self-reliance. Inordinate 
desire for wealth is in itself many times the cause of loss of 
savings, because people take extreme risks in the hope of extreme 
profits. As a result, a paradox many times develops that may 
be stated as follows: 

“He who makes money the slowest , makes it the fastest; 
he who makes it the fastest, makes it the slowest .” 

We Get What We Give 

The early chapters of this text discussed the fundamental 
law of action and reaction in some detail. We repeat the words 
of Emerson there used: “Action and reaction we meet in every 
part of nature. To empty here, you must condense there, if 
the South attracts, the North repels, if you tax too high, the 
revenue will yield nothing.” Similarly, the obtaining of a 
financial independence can only be done at some cost. We can 
only get what we give. The portion that is asked of us is 
small. We cannot expect to sit back and wait for the fruit to 
drop in our lap. We must give thought, time, prudence, judg¬ 
ment, patience, and self-reliance. 

Your Future 

Your financial ship is now completed. We believe that with 
a man of action at the helm, it can successfully navigate the 


The Art of Right Thinking 59 

tempestuous seas of money-making. You have a ship that is 
amply sea-worthy and is sufficiently strong and sound to with¬ 
stand any strain placed upon it. What will the cargo be? 
Throughout the text you have been asked numerous questions 
to test your understanding of basic specific principles. These 
particulars, if properly absorbed, will result in crystalizing your 
mind into an economic burning glass, which, when focused upon 
investment and speculative propositions, should give you an 
extraordinary penetrating and forecasting ability. 

It now remains for your practical application. Scrutinize 
every financial proposition systematically, through your newly 
acquired knowledge. The only way this can be successfully 
accomplished is to question everything. Kipling says: 

“I have six faithful serving men, 

They taught me all I knew , 

Their names are: ‘what,’ and ‘why,’ and ‘when,’ 

And ‘how,’ and ‘where,’ and ‘who’.” 

A thorough questioning and thoughtful decision will insure 
a most valuable cargo. As your ship sails over your “life 
career” course to financial independence, you will immediately 
sweep from your path the thousands of derelicts, frauds and 
parisites, which infest the financial world. As you stand upon 
the deck of your financial ship, never allow a proposition to 
become a part of your cargo until it satisfies your judgment 
in the light of the following questions: 

THE ENTERPRISE 

1. Its character? 

2. Is it new or tried? 

3. Possibility of keen competition? 

4. If tried, has it been profitable previously? 

5. Why has it been called to your attention? 

6. Do present and probable future conditions favor its opera¬ 

tion? 

7. Do you think it offers possibilities superior to others? 


60 


The Search for Bargains 

WHAT HAS IT TO OFFER? 

First — Property 

1. What property is controlled? 

2. Is it owned or leased? 

3. How has the value of the property been estimated? 

4. Have titles to property been validated? 

5. Where located? 

6. If leased, do leases protect stockholders? 

7. What would value be in forced liquidation? 

8. If new, is cost to company moderate? 

9. If old, has proper depreciation been set aside? 


Second — Operations 

1. What has been done? 

2. Has development work been carried on with judgment? 

3. How have difficulties been overcome? 

4. Does the past operating expense look large or small? 

5. Has the company shown ability to curtail operations when 

necessary? 

6. What have been the general results? 


Third — Financial Backing 

1. Who is behind the enterprise? 

2. What is their past record? 

3. What are present assets? 

4. What are present liabilities? 

5. Has the company a good working capital? 

6. What is proportion of working capital to total assets? 

7. Has the property any mortgages outstanding? 

8. Who holds them? 

9. When are they, and any notes outstanding, due? 

10. Relation with the banks? 

11. Is bank assistance expected or has it ever been used? 


The Art of Right Thinking 61 

WHO WILL HANDLE YOUR MONEY? 

1. Who are the directors? 

2. Who are the officers? 

3. What is their past record? 

4. Does the board of directors direct or are they dummies? 

5. Does the company operate through an executive committee? 

6. Who comprises it? 

7. Are the directors and officers stockholders? 

8. What is the amount of their holdings? 

9. Has the past management been effective? 

10. Are they men of large calibre? 

11. Salaries paid ? 

12. What is their labor record? 

WHAT IS GOING TORE DONE? 

1. Is a general plan of operation laid out? 

2. If so, what is its basis? 

3. Is control of markets sought? 

4. What are to be relations with competitors? 

5. Is a budget system to be used? 

6. Has the future been figured out with care? 

7. Have future operating costs been estimated? 

8. What proportion of earnings will be set aside? 

WHAT ARE YOU BUYING? 

1. Investment, speculative-investment, or speculation? 

2. What is its price level? 

3. As compared with former prices? 

4. As with similar securities? 

5. What securities are ahead of it? 

6. What restrictions, if any, surround it? 

7. Does security offered carry voting power? 

8. Who controls the company? 

9. In what state is company organized? 

10. What is the authorized amount of the stock? 


62 The Search for Bargains 

11. What is the issued amount of the stock? 

12. Is the mortgage, if any, open or closed? 

13. What protection have minority stockholders? 

WHY ARE YOU BUYING? 

1. Who asked you to buy? 

2. If any one, what is their record? 

3. Do you want income or profit? 

4. Can you check up statements made to you? 

5. Have you considered the risks? 

6. Does possibility of profit far outweigh them? 

7. Do you expect to get rich quick? 

8. Have you a definite objective in view? 

9. What position of the stock market cycle are you in? 

10. Have you considered the relation of the company to 

conditions? 

11. Do you expect the latter to improve? 

12. If you buy now, it is because you consider the 

prise sound, its future sanely determined and well 
mapped out, its present position good, its manage¬ 
ment capable and honest, its financial backing 
strong and its future promising good profits to all 
partners. If you don’t, don’t buy! 


general 

enter- 




Garden City Press, Inc. 
Newton, Mass. 






TEST QUESTIONS 

“SEARCH FOR BARGAINS” 

1. Does the Stock Market Discount? If so why? 

2. What is the value of stock dividends? 

3. What are the outstanding lessons of the crises of the 
past 100 years. 

4. What can we expect in the future? 

5. What do you consider an Investment? 

6. Would you rather buy high or low priced issues? Why? 

7. Why should anyone avoid stocks when looking for an 
investment? 

8. How may you determine when stocks as a whole are a 
purchase? 

9. How can you determine the period in which you should 

sell? 

10. What types of enterprise should prosper over the next 
twenty years and why? 

11. How can you check up on Industrial earnings statement 
and why do you need to? 

12. Why have you taken this Course? Is your objective 
definitely outlined? Do you recognize the sacrifices necessary 
to gain Financial Independence? 





























































































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